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There Ain’t No Such Thing As A Free Subsidy

Here’s a letter to Foreign Policy: (HT Greg Rehmke)

Gideon Rachman believes that “the normal rules about the mutual benefits of trade do not necessarily apply when one trading partner is practicing mercantilist or protectionist policies” (“Think Again: American Decline,” Jan./Feb.).

He’s correct, but not in the way that he thinks.  Whereas Mr. Rachman believes that mercantilist and other protectionist policies help the countries that practice these policies and harm countries that trade freely, something closer to the opposite is true.

By erecting tariffs that dampen competition, mercantilism encourages home producers to become unresponsive and uncreative.  By issuing subsidies paid for with higher taxes, government debt, or distortionary monetary policies, mercantilism helps exporters only by inflicting more-sizable damages on the nation’s economy writ large.  By turning the national government into a bazaar for the buying and selling of monopoly privileges, mercantilism deflects entrepreneurial energies away from building better mousetraps and into building politically advantageous political connections.  And by raising prices in the home market, mercantilism makes consumers poorer as well as makes producers who rely upon imported inputs less efficient.

So indeed, to the extent that Americans’ trades with non-Americans are conditioned by foreign-governments’ mercantilist policies, the gains from these trades are not mutual: they flow exclusively to Americans.

Donald J. Boudreaux